IMPACT ASSESSMENT OF COVID-19 ON INDONESIA’S MANUFACTURING FIRMS

SURVEY RESULTS MAY-JUNE

ii

Acknowledgments

This report was produced by the UNIDO Field Office in Indonesia with the support and technical

assistance of UNIDO’s Policy Research and Statistics Department and the Asia and the Pacific

Regional Coordination Division. Special thanks go to all ministries and associations that

supported the implementation of the survey as well as to the respondents from the private sector,

including micro, small, medium and large enterprises, who dedicated valuable time during this

pandemic to contribute to the survey.

Disclaimer

This report provides information about a situation that is rapidly evolving. As the circumstances and

impacts of the COVID-19 pandemic are continuously changing, the interpretation of the information

presented here may also have to be adjusted in terms of relevance, accuracy and completeness.

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Key findings

i) The study finds that small- and medium-sized enterprises have been hit hardest by the

COVID-19 pandemic and containment measures. Nearly 60 per cent of all respondent firms

reported that at least half of their employees have been unable to go to their workplace due

to the government restrictions. This has led to a severe reduction in business operations,

especially for SMEs and technology firms.

ii) The majority of firms emphasize that if the COVID-19 restrictions continue, they may be

forced to close their business operations within six months; however, some firms

remained optimistic that they would be able to recover quickly if the pandemic and the

related restrictions were to end soon.

iii) The drop in market demand is the biggest threat to a company’s economic survival. The

majority of firms confirm a decline in demand and revenue. Around 82 per cent of firms

reported a reduction in orders, while 92 per cent expected their revenues to fall. The impact

of a decrease in demand will affect the ability of businesses to function properly and will

cause severe liquidity shortages. Some businesses have considered a reduction of staff, as

they are unable to continue paying their staff’s salaries. Findings show that SMEs are more

vulnerable to the economic consequences of ‘social distancing’ measures than larger

companies.

iv) The shortage of cashflow is reported as the second biggest problem businesses are facing

due to government containment measures. The survey shows that 81 per cent of firms

expect a loss of revenue of more than 50 per cent in 2020 compared to 2019, regardless of

the firms’ location (whether inside or outside the provinces with high infection rates).

v) Around 40 per cent of businesses surveyed have received government support. The

majority of those firms stated that government support has been beneficial. Of all firm

types, low-technology firms account for the lowest share of businesses benefitting from

government support compared to those in other industries, with only 34 per cent of low-

technology firms reporting to have received government support. Small-size firms have

less access to support provided by the government’s stimulus schemes.

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vi) The government support received by the microenterprises in the form of interest subsidies

and recap guarantee relief programmes (KUR, PMN, Pengadaian) was the favoured form

of government support. The firms’ second most favoured scheme is a 6-month tax

exemption or tax-rate reduction. Firms have clearly benefitted from government assistance,

which has yielded positive results for the continued survival of companies during the

pandemic.

vii) The majority of firms stated that the government should implement policies to reduce the

cost of rent and utilities. This policy was proposed by 82 per cent of microenterprises and

72 per cent of food processing firms. In the context of the pandemic, firms would like to

see the government provide additional support to businesses to remain afloat in the midst

of the crisis.

viii) This study highlights that SMEs need direct support from the Government of Indonesia

in the form of new financial schemes for MSMEs, providing capital loans designed to

stimulate business and complement existing MSME-related policies. SMEs outline their

financial difficulties in the survey, and would like to see the government assist them with

liquidity shortages and overall assistance to ensure the continuity of their business.

However, further steps are necessary to help SMEs become more resilient to future

challenges beyond the pandemic.

ix) This study recommends several policy options, including leveraging the current

government support schemes, employment retention, building SME productivity and

competitiveness, driving innovation and technology adaptation.

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Table of Contents

1 Rationale ....................................................................................................................... 1

2 Method and data ............................................................................................................. 1

2.1 Online survey ................................................................................................................... 1

2.2 Typology of firms ............................................................................................................. 2

2.3 Data .................................................................................................................................. 3

3 Findings and analysis ...................................................................................................... 5

3.1 Current impact of COVID-19 ........................................................................................... 5

3.2 Expected impact of COVID-19 ........................................................................................ 9

3.3 Dealing with COVID-19 ................................................................................................ 13

3.4 Government support ....................................................................................................... 15

4 Policy recommendations ............................................................................................... 19

Annex 1: Questionnaire ..................................................................................................... 23

1

1 Rationale

The worldwide outbreak of COVID-19 poses unprecedented socio-economic challenges for

countries around the world. Countries are not only facing a health and humanitarian crisis, but an

economic crisis as well. Restrictive measures aim to contain the transmission of the virus by

limiting social contact and ensuring that individuals infected with COVID-19 and potential

contacts isolate to protect public health, but they have also slowed down most economic activities.

Lockdown measures have halted or reduced the production of goods and services. This has had

serious implications on national and global supply chains, businesses and workers’ livelihoods.

Due to the nature and scale of firms, the output of production of many small and medium

enterprises (SMEs) has experienced a significant blow. In Indonesia, over 90 per cent of firms are

classified as SMEs, thus the challenges they face will influence the stability of Indonesia’s

economy.

The United Nations Industrial Development Organization (UNIDO) has supported the

Government of Indonesia since the 1970s, focussing in particular on SMEs. UNIDO seeks to

promote inclusive and sustainable industrial development (ISID) through the implementation of

various programmes and projects in cooperation with national institutions. To arrive at sound

policy recommendations and assess relevant programmes that can address the impact of the

COVID-19 pandemic on SMEs, UNIDO launched the survey “COVID-19 – Impact Assessment

on SME Businesses”. The survey assesses the impact of COVID-19 on firms and explores

strategies to overcome the challenges. This survey has also been conducted in other Asian

countries, including Malaysia, Thailand, Afghanistan, Bangladesh, Cambodia, Iran, Lao PDR,

Mongolia, Pakistan and Viet Nam.

2 Method and data

2.1 Online survey

UNIDO Indonesia launched the online survey from June to July 2020 to better understand SMEs’

situation, challenges and needs. The survey was launched in collaboration with the Indonesian

Chamber of Commerce and Industry, Ministry of Cooperatives and SMEs. UNIDO has sought to

capitalize on the organization’s regional networks in Indonesia, including project partners and

firms, to gain in-depth insights. This report presents the findings of the Indonesian survey.

2

The survey questionnaire was designed by UNIDO’s Department of Policy Research and

Statistics and the Regional Hub Office in Thailand. The survey itself was based on the 2020

ESIEC1 questionnaire on the Resilience of Micro, Small and Medium Enterprises under the New

Coronavirus Outbreak (COVID-19). The questionnaire contained 23 questions comprising four

sections: i) expected impacts of COVID-19; ii) current impacts of COVID-19; iii) dealing with

COVID-19, including government support; and iv) general information about responding firms.

UNIDO Indonesia targeted approximately 500 small enterprises to participate in the online

survey. However, only 151 SMEs filled out the questionnaire. The likely reason for the low

response rate among SMEs is the numerous requests they have received from various national

research institutions seeking to obtain data. Unsurprisingly, repeated requests for data sharing

may lead to weariness and a low response rate.

2.2 Typology of firms

The respondent SMEs are classified into three categories:

i) Small and medium enterprises (SMEs) are considered firms with revenues, assets or a

number of employees below a certain threshold. The category ‘firm size’ in the questionnaire

is based on number of employees.

In accordance with SME Law 20/20082, SMEs in Indonesia are classified on the basis of

net assets and annual revenue from sales.

Table 1 Firm categories in Indonesia

Source: Central Information Commission of Indonesia

1 Enterprise Survey for Innovation and Entrepreneurship in China (ESIEC), led by Peking University. 2 https://komisiinformasi.go.id/?p=1830

Category Assets (excluding land and

building)

Annual revenue from

sales

Micro Up to IDR 50 million Up to IDR 300 million

Small Over IDR 50 million to IDR

500 million

Over IDR 300 million

to IDR 2.5 billion

Medium Over IDR 500 million to IDR

10 billion

Over IDR 2.5 billion to

IDR 50 billion

Large Over IDR 10 billion Over IDR 50 billion

3

ii) Market orientation – we distinguish between two types of market orientation:

• Exporter: firms that sell more than 25 per cent of their production to foreign countries;

• Domestic: firms that produce more than 75 per cent for the domestic market. “Domestic

upstream” firms refer to businesses that sell intermediate goods in the domestic market;

“domestic downstream” firms denote businesses that sell finished goods in the domestic

market.

iii) Industry group and level of technology of firms. Firms are grouped into three industries: i)

food processing; (ii) low-technology firms (low-tech); and iii) medium- to high-tech firms.

2.3 Data

While 151 firms responded to the questionnaire, the responses of only 147 firms were returned

completed and used for analysis. Of the 147 firms, 22 per cent were microenterprises, 64 per cent

were small and medium enterprises, and the remaining 14 per cent were large firms.

The answers to some of the questions were not quantifiable. In such cases, we only included valid

responses that can be quantified, and excluded responses that could not be quantified, such as

“don't know” or “too early to state”. Information on the precise response rate is provided for those

questions.

To complement the data derived from the online survey, we used secondary data from official

sources, including government releases, news articles and related publications.

2.3.1 Respondent firms by type

Nearly 60 per cent of survey respondents were domestic firms that sold their products in the

domestic market, primarily to final consumers; 30 per cent were exporter firms that sell at least

10 per cent of their products abroad. The remaining firms sell their products to other businesses

in the domestic market.

Based on the survey results (Figure 1), half of the respondent firms were low-technology

companies in various industries, such as apparel, textiles and wood products. Food processing

firms made up 34 per cent of respondents, and the remainder (17 per cent) were medium- and

high-technology firms.

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Figure 1 Responses by firm type

2.3.2 Firms and COVID-19

The majority of firms are located in provinces with the highest number of COVID-19 cases: West

Java (31.4 per cent of firms), Central Java (17.6 per cent of firms), and DKI Jakarta (16.3 per cent

of firms), ranked 5th, 3rd and 1st in terms of COVID-19 case numbers. Information on the number

of cases was obtained from the government’s official website, Gugus Tugas Percepatan

Penanganan COVID-193, or the COVID-19 task force established to deal with the pandemic. The

task force was established by the Indonesian government to coordinate inter-agency activities to

prevent and mitigate the impact of COVID-19 in the country. The task force was created on 13

March by Presidential Decree No.7 of 2020, and is directly accountable to the President of

Indonesia. The task force coordinates the work of the National Disaster Management Agency,

related ministries, agencies and other government units such as the Ministry of Health, the

Indonesian National Police, the Indonesian National Army and local governments.

Information on case numbers was obtained from the task force’s website and WHO Indonesia

reports at the end of July 20204. The definition of provinces with high infection rates refers to

provinces with more than 50 cases per day. Currently, the majority of provinces in Indonesia are

dealing with a high COVID-19 infection rate, as illustrated in Figure 2 below.

3 https://covid19.go.id/peta-sebaran 4 https://www.who.int/docs/default-source/searo/indonesia/covid19/who-situation-report-18.pdf?sfvrsn=9fd5302_2

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Figure 2 Geographic distribution of cumulative number of confirmed COVID-19 cases in

Indonesia across provinces reported between 23 to 29 July 2020

Source: World Health Organization COVID-19 Situation Report)

3 Findings and analysis

3.1 Current impact of COVID-19

a) The Government of Indonesia has been implementing extensive social distancing measures

since 31 March 2020 to manage the COVID-19 pandemic by issuing Government Regulation

21/2020.5 Many local governments immediately followed suit, requiring companies to

temporarily halt or reduce their business activities. The impact of this policy is reflected in

the survey results (Figure 3), with nearly 60 per cent of respondents stating that half of their

employees were unable to work. This is the case in particular for SMEs and low-technology

firms since they are largely labour-intensive. Nearly 90 per cent of microenterprises and 66

per cent of SMEs reported a shortage of workers as one of their main operational difficulties

(Figure 6).

5 https://jdih.setkab.go.id/PUUdoc/176085/PP_Nomor_21_Tahun_2020.pdf

6

Figure 3 Percentage of employees unable to work

b) The payment of wages and social security contributions were firms’ primary financial

concern. The ability to pay invoices, loans and fixed costs was the second most reported

problem by SMEs, especially because of expected cashflow shortages in the coming months,

forcing them to make difficult choices and decide which payments to prioritize (Figures 4 and

5). A higher percentage of SMEs (66 per cent) and large companies (76 per cent) reported

these financial issues to be their main problem, compared to microenterprises (44 per cent).

Indonesian firms are required to contribute 2 per cent of their employees’ salaries (capped at

a maximum of IDR 7,000,000 per month) to the Workers Social Security Fund (BPJS

Ketenagakerjaan or BPJS-TK),6 which covers pensions, work accidents, death, and old age

insurance. Large and medium-sized firms are more likely to have contributed to BPJS-TK in

addition to other business expenditures compared to small and microenterprises.

Microenterprises expect the biggest decline in revenue, with 92 per cent of respondent firms

expecting a 50 per cent decrease. This figure is in line with the responses of the industrial

groups, with 80 per cent of food processing and low-technology firms anticipating a 50 per

cent decrease, as most of them can be categorised into one of the two groups.

When we look at firms’ market orientation, domestic upstream firms expressed the highest level

of concern about the payment of wages (80 per cent), of invoices (73 per cent), and fixed costs

(53 per cent) compared to other firm types. This may be one of the consequences associated with

6 https://home.kpmg/xx/en/home/insights/2015/08/flash-alert-2015-104a.html

7

firms’ biggest business problem, namely a reduction in orders, with 93 per cent of domestic

upstream firms citing this issue (Figure 7).

Figure 4 Main financial challenges

Figure 5 Impacts on revenue

c) Cashflow shortages represent the biggest operational challenge during the pandemic, with

over 90 per cent of respondent firms of all sizes, types and levels of technology reporting this

problem (Figure 6). The main cause, according to more than 80 per cent of firms, is a

reduction in orders. One-third of firms, especially microenterprises and SMEs, also reported

8

increased difficulty in obtaining financing. Fulfilling contracts is also a major challenge for

over 80 per cent of firms. Around 70 per cent of firms reported a shortage of inputs and

workers, which may have been caused by the government’s containment measures preventing

workers from returning to the workplace, thus disrupting value chains and logistics in the

process. The disruption of logistics has affected large firms and medium and high-tech firms

the most compared to other firms in their respective categories (Figure 7).

Figure 6 Main operational problems

Figure 7 Main business problems

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3.2 Expected impact of COVID-19

a) Many of the 124 respondents expected major losses in revenue this year, in particular

microenterprises (92 per cent) stating that they anticipated a loss in revenue of over 50 per

cent (Figure 8). Microenterprises did not favour layoffs as a means to save their business,

with nearly 70 per cent of microenterprises stating that they were not considering layoffs.

That said, half of the microenterprises that do expect to have to lay off employees might only

be able to retain 25 per cent of their staff (Figure 9). This situation requires more attention,

considering that major layoffs will lead to a high unemployment rate and could exacerbate

the country’s economic and social problems.

Figure 8 Expected loss in revenue (in %)

b) Furthermore (Figures 8 and 9), a quarter of large firms, as well as medium- and high-tech

firms, demonstrated a level of optimism and expect a lower decrease in revenue for 2020,

namely between 20 per cent and 50 per cent. Moreover, even those larger firms that expect to

have to lay off staff are optimistic. More than 70 per cent of large firms expect to have to cut

less than one quarter of their staff. There were slightly more exporter firms who are

considering layoffs compared to domestic upstream and downstream firms, but there are more

downstream firms that may have to lay off more than half of their staff compared to the other

two firm types.

10

Figure 9 Government restrictions

c) Over two-thirds of respondents stated that the current restrictions (Figure 9) have an impact

on them and nearly 60 per cent would have to shut down within six months, because their

company’s cashflow would no longer be able to sustain their operations. Surprisingly, one-

third of microenterprises and domestic upstream firms expected to be resilient enough to

survive a year-long period of restrictions (Figure 10). Such resilience is shared with less than

one quarter of large firms in the survey, while over half of the large firms stating that they

would only be able to survive less than three months if the current restrictions continue. If

large companies go out of business, the ripple effect could reach the national scale and last

for an unpredictable amount of time, as their suppliers would also experience a number of

business problems.

d) There are several possible reasons why an MSME could survive a year-long restriction:

• First, many MSMEs established their digital platform before the outbreak of COVID-19,

and already successfully shifted from physical to digital work since the restrictions were

imposed. This hypothesis is supported by data presented by Indonesia’s Coordinating

Minister for Economic Affairs, Airlangga Hartarto, during a webinar on MSME

adaptations to the ‘new normal’ in mid-July 2020. According to Minister Hartarto, as

quoted by the state-owned news agency Antara, more than 300,000 micro, small, and

medium enterprises had undergone a digital transformation7. Many MSMEs sell their

7 https://en.antaranews.com/news/151032/over-300000-msmes-go-digital-amid-covid-19-pandemic

11

products through their own websites, through social media such as Instagram and

Facebook, as well as online marketplaces such as Tokopedia, Shopee, Bukalapak, Blibli

and Lazada.

• Second, app-based delivery start-ups in Indonesia are thriving and can support MSMEs’

digital transformation. Examples include Gojek, Grab, Paxel and Help. With the

assistance of these goods delivery apps, especially of goods that are time-sensitive, such

as food and beverages, MSMEs have continued to thrive during lockdown. The increase

was recorded by Paxel, which offers flat-rate same-day inner city and intercity delivery

through its Paxel Buy & Send Insight II with a network of 650 MSMEs8. Nearly 60 per

cent of MSMEs surveyed reported an increase of new customers in other cities due to

Paxel’s intercity same-day delivery services.

• Third, many MSMEs demonstrated their agility by shifting away from their core products

to the production of goods that are in demand. For example, restaurants and street food

merchants have started producing frozen and vacuum-sealed food that customers can take

home and enjoy. Many businesses have shifted their production facilities to produce and

sell fabric masks and other personal protective equipment.9 Various skincare and wellness

goods producers have started producing hand sanitizer and disinfectant products. These

products have been highly sought after, with people being instructed to maintain a high

standard of personal hygiene and sales of these products could help cushion the blow of

the slump in demand for other products.

The combination of the three aforementioned factors could help many SMEs stay afloat

amidst the ongoing coronavirus outbreak. It may also ignite a sense of optimism that their

company could survive a year of restrictions

8 https://industri.kontan.co.id/news/paxel-catat-57-ukm-alami-peningkatan-pelanggan-baru-di-tengah-

pandemi-covid-19 9 https://katadata.co.id/agungjatmiko/berita/5ef5f20c333df/ragam-strategi-umkm-di-tengah-pandemi-

covid-19

12

Figure 10 Expected survival with current restrictions

e) It is encouraging that the majority of firms expect to recover quickly once the pandemic ends.

More than half of the respondents estimate that they will be able to recover within one month,

and nearly one-third of respondents expect to recover within two to three months after the

pandemic ends (Figure 11). Only 5 per cent of 147 firms of all sizes, types and levels of

technology expect their recovery period to take more than six months.

Figure 11 Expected recovery time

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3.3 Dealing with COVID-19

a) To offset the impact of the cashflow shortage, most firms chose to reduce their operating costs

and negotiate with their lenders, while other firms chose to take out loans from commercial

banks, microfinance loans and equity financing. Only a very small percentage of firms took

loans offered by fintech companies.

Figure 12 Dealing with cashflow shortages

b) It is interesting to note that 42 per cent of large firms are considering taking loans from

commercial banks, while less than 30 per cent of MSMEs are considering this option (Figure

12). This may partly be attributable to the fact that most Indonesian SMEs are not considered

bankable10, do not have assets that can be made into collateral, and are concerned about high

interest rates. Many microenterprises are considering taking microfinance loans instead, with

a more manageable interest rate.

c) SMEs and large firms have opted to delay the delivery of customer orders, a policy that is

being implemented by one-third of downstream industry firms and nearly 60 per cent of

medium- and high-tech firms, as they have to limit the amount of staff present at work. As

Figure 13 illustrates, the majority of firms will delay the provision of services, which is the

most favoured option for managing the shortage of workers due to government restrictions

and containment measures. Across the board, large firms (38 per cent), domestic upstream

firms (33 per cent), and especially medium- and high-technology firms (58 per cent) intend

to delay delivery (Figure 14).

10 https://www.ilo.org/wcmsp5/groups/public/---asia/---ro-bangkok/---ilo-

jakarta/documents/publication/wcms_695134.pdf

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Figure 13 Dealing with worker shortages

d) As Figure 14 illustrates, over 80 per cent of respondent firms of all sizes and types reduced

their production to deal with the shortage of inputs. Domestic upstream firms (88 per cent)

favour reducing their production, while the second most preferred option among the firms in

this category is to explore new procurement channels to identify key areas that require

modification to improve their business performance. Another coping measure preferred by

36 per cent of low-tech and 33 per cent of high-tech firms is to delay the delivery of their

products, while exporters and domestic downstream firms considered the possibility of

creating new production channels. The latter is an important strategy that can enhance

business marketing and give companies an edge in terms of speed and efficiency

Figure 14 Dealing with input shortages

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d) As regards difficulties fulfilling existing contracts, the majority of firms (56 per cent) opted

to find mutual agreements, while a smaller percentage of firms expect the government to

coordinate and provide clear disclaimer agreements. This strategy is used by a large amount

of medium- and high-tech firms (73 per cent). Nevertheless, other potential options are

available to deal with this challenge. These options include government coordination,

payment of liquidated damages, and legal or arbitral settlement. Nearly 25 per cent of all

firms support government coordination of solutions to these problems.

Figure 15 Dealing with problems to fulfil contracts

3.4 Government support

a) The Government of Indonesia has implemented some policies to help firms cushion the blow

of the current health crisis on their business activities. At the end of April 2020, Indonesian

President Joko Widodo announced five schemes to protect the economy and help it recover11,

aimed in particular at MSMEs. Furthermore, the President stated that a special programme

for ultra-microenterprises and microenterprises, which have not yet been reached by any

financial institutions, will be introduced.

The five schemes are as follows:

i) Social support programmes for MSMEs that can be categorised as at risk and vulnerable

to the impact of COVID-19. The scheme includes direct cash transfers, food packages,

and the reduction or elimination of electricity costs;

11 https://setkab.go.id/5-arahan-presiden-soal-skema-program-perlindungan-dan-pemulihan-ekonomi-

utamanya-umkm/

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ii) Tax incentives for MSMEs with an annual revenue of less than IDR 4.8 billion;

iii) Debt restructuring through a variety of schemes, such as coop credit restructuring and

postponing loan repayment, including schemes for microenterprises that have already

received business loans from the local government;

iv) Financing schemes for MSMEs, including working capital for both bankable MSMEs

and those that are not bankable.

v) State-owned and provincial-owned enterprises are mandated to act as buffers of the

MSME business ecosystem, especially in the context of initial recovery. They are

expected to be the off-takers of MSME products in various fields, such as agriculture,

fisheries, culinary and household industries.

Furthermore, the Government of Indonesia has prepared an economic stimulus programme

for MSMEs and cooperatives 12.

b) As much as 41 per cent of respondent firms (Figure 16) stated that they have received

government support, with more than half of domestic upstream firms and medium- and high-

tech firms reporting that they have benefitted from support. Furthermore, nearly 50 per cent

of microenterprises stated that they have received government support, suggesting that the

support schemes have reached those that are most in need. The government support received

by microenterprises has mostly been in the form of interest subsidies and recap guarantee

relief programmes, which was the most favoured form of support among those firms,

followed by a 6-month tax exemption or tax-rate reduction (Figure 17). Medium- and high-

tech firms (27 per cent) stated that they had received government support mostly in terms of

fiscal incentives; 33 per cent of domestic upstream firms benefitted from government support

in the form of MSME tax exemptions. Around 17 per cent of all respondent firms reported

that they had received interest subsidies and recap guarantee relief programmes (KUR, PMN,

Pegadaian). Microenterprises and domestic upstream firms received the highest share of this

type of support (above 30 per cent).

12 https://www.bi.go.id/en/iru/presentation/red/Pages/Republic-of-Indonesia-Presentation-Book-July-

2020.aspx

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Figure 16 Who is benefitting from government support?

Figure 17 What form of government support are firms receiving?

c) The report examined various types of support measures and subsidies provided by the

government. The survey results indicate that the interest subsidy and recap guarantee relief

programmes were the favoured form of support among the firms; 64 per cent of the firms

emphasised that this type of support would be very useful in ensuring their sustainability

(Figure 18). Fiscal incentives were also deemed a useful tool by the respondent firms. On the

other hand, the exemption of MSME income tax (to 0 per cent) for six months was perceived

as being slightly less beneficial in comparison to other support schemes.

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Figure 18 How useful is government support for firms?

d) When looking at firm type, domestic downstream firms preferred government support in the

form of reductions in rent and utility costs, followed by a reduction in financing costs or

improvement of loan terms. On the other hand, domestic upstream firms preferred tax-rate

reductions or tax deferrals over other support measures. When asked about the type of

government support they believed to be most effective for their companies (Figure 19), most

firms (especially microenterprises) preferred support in the form of reductions of rent and

utility costs. Nearly 80 per cent of large firms preferred tax reductions or deferrals. The latter

policy was also preferred by the majority of medium- and high-tech firms.

Figure 19 What policies should be applied?

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4 Policy recommendations

COVID-19 restrictions have hit many MSMEs particularly hard from both the demand and the

supply side. The survey’s results indicate that recovery efforts should focus on stimulating

demand and re-establishing disrupted markets. Over 80 per cent of firms participating in the

survey reported a reduction in orders as their main business challenge during the pandemic and

more than 90 per cent of them expected a drop in revenue. This situation can be remedied by

analysing the psychological factors and the source of motivation that drives consumer demand in

the context of a pandemic. This analysis can be used to determine the direction of product

development and innovation to match customers’ needs and demands as well as shape the

MSMEs’ marketing communications strategy to stimulate demand for goods and services, thereby

re-establishing disrupted markets.

Policies tailored to mitigate the impact of the pandemic would help build a stronger economy as

well as a resilient and competitive industrial sector, both of which would help Indonesia to achieve

inclusive and sustainable industrial development as outlined in SDG-9. While coping with the

“new normal”, as suggested by the International Trade Centre in its most recent SME

Competitiveness Outlook, the policy response should consider the following guiding principles13:

i) The future will be about resilience, as societies will no longer accept being

unprepared for external threats.

ii) The future will be more digital. This virus has shown us the full power of these

technologies in the context of the crisis.

iii) The future must be inclusive. The inclusiveness in the context of globalization was a

matter of concern even before the outbreak of the pandemic. Ensuring prosperity

across society during the recovery phase will be crucial to maintain popular support

for open economies.

iv) The future must be sustainable to mitigate the challenges of climate change.

13 https://www.intracen.org/uploadedFiles/intracenorg/Content/Publications/ITC_SMECO-

2020ExSummary_EN_web.pdf

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The report outlines the following recommendations:

i. Leveraging the current government support schemes

The Government of Indonesia has taken steps to develop strong policies to support economic

stimulus to address the SME liquidity gap and keep the MSME segment afloat. Around 41 per

cent of surveyed firms stated that they have been receiving government support in various

forms, with interest subsidies cited as the most useful support for firms.

Some improvements should be considered to make the schemes more effective and targeted:

• Improving awareness for access to government economic stimulus for SMEs, such as

subsidies for loan repayments and direct assistance for business liquidity.

• Extending tax exemption for a minimum of another 5 years;

• Expand the possibility for reductions in the tariffs of electricity and water for firms.

ii. Employment retention scheme

The survey results show that wage and social security expenses are considered to be the highest

financial burden for firms during the pandemic. Even though layoffs were not firms’ favoured

option to ease their financial burdens, the cashflow shortages along with other unsolvable

business issues due to the containment measures could force businesses to close down. If

MSMEs lay off workers, the country’s unemployment rate will rise, which will cause financial

difficulties for large shares of the population.

The government developed the wage subsidy scheme to sustain businesses, and consequently

to retain jobs. We suggest channelling wage subsidies to micro, small and medium-size

businesses as well as to domestic downstream firms. Channelling the wage subsidy to

appropriate targets will improve the policy’s effectiveness while at the same time increasing

firms’ confidence in their business continuity.

iii. Building up SME productivity and competitiveness

Prior to the pandemic, SMEs in Indonesia faced challenges in terms of improving their

productivity. This is the result of several factors including the strong focus on traditional forms

of marketing only, the lack of supporting infrastructure, a shortage of skills, the scarcity of

capital goods, poor management, and the unavailability of adequate financing facilities. The

generalized government support currently available—highlighted by the survey—means

SMEs can choose between various schemes to expand their ways of doing business and to

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improve their resilience in the face of crisis. Efforts to increase their productivity may include

modernizing business operations through better management techniques, upgrading the skills

of their employees, and adopting a higher level of technology for their business activities.

The results of the survey show that policies should prioritize the boosting of SMEs’

productivity and competitiveness by supporting nature-based start-ups, programming a green

stimulus and targeting high-carbon and resource-intensive industries. Priority should be given

to measures that create jobs and have linkages with the climate, nature and resource efficiency

agendas. Moreover, the policy priority should also demonstrate how investments in climate-

friendly and nature-based actions will stimulate economic growth, create employment

opportunities, and increase resilience to a recurrent zoonotic threat. There is a need for

increased fiscal spending on public employment programmes to promote greater labour market

resilience.14

iv. Innovation and technology approach

Supporting the recommendations made above, innovation is crucial, especially in the

production and marketing stages. Strategies to strengthen the industrial sector can be improved

by taking advantage of new technologies and standards for smart production and participation

in global value chains. Linking with the UNSDCF innovation and technology component15

and the UN Framework on socio-economic response to COVID-19, government policies

should highlight how innovative new technologies can be leveraged, considering the surge of

digital capabilities, artificial intelligence, IoT and interconnectivity and cloud-based resources.

Innovation can be improved through:

• The use of advanced technology – acceleration of the fourth industrial revolution

(Industry 4.0 or 4IR): the COVID-19 crisis is likely to result in the structural

transformation of the manufacturing sector in the “new normal”. 4IR will be one of

the defining factors in the “new normal”, helping industry return to becoming

operational as soon as possible, and providing the platform to develop new, more

resilient and sustainable operations, value chains and businesses.

• Digital platform collaboration: selling products in physical marketplaces is not

effective in the context of the containment measures. Hence, SMEs have had to

14 Source from UN Framework for the Immediate Socio-Economic Response to COVID-19,

INDONESIA, INNOVATION AND TECHNOLOGY ANALYSIS document 15 https://un.or.id/publications/322-united-nations-sustainable-development-cooperation-framework-

unsdcf-2021-2025

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accelerate their digitalization process and sell their products on digital platforms. The

government initiated the SME platform that can be used as a marketplace and extend

collaboration with the existing e-commerce marketplaces such as Bukalapak,

Tokopedia and Shoppee.

• Clustering for producers: by expanding their network among producers of similar

products, SMEs can learn from each other by having interactive discussions and

immediately addressing the problem of low productivity. If they face problems in

fulfilling orders due to their currently limited capacity, they can utilize their network

and share the production. Online networking discussions have become increasingly

popular among SMEs amidst this pandemic.

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Annex 1: Questionnaire

COVID19: IMPACT ON SMALL & MEDIUM ENTERPRISES SURVEY

This survey form was developed in order to collect socio-economic impacts from SME businesses

sector and the supporting needs regarding Covid-19 pandemic.

Current impact of COVID-19

1. Because of the pandemic, what is the percentage of your company’s employees who are

unable to physically come to work and cannot adequately work from home at present?

_________%

I don’t know

1.1 If percentage can be estimated in Question 1, please specify percentage of woman employees

(% women).

2. Please indicate the most significant financial problems for your firm during the outbreak

(please select all that apply):

Staff wages and social security charges

Fixed costs, e.g. rent

Repayment of loans

Payments of invoices

Other expenses, please specify: ________________

No specific problem

3. Are there any other business problems your firm is facing due to the pandemic? (Up to two

options)

Reduction of orders

Inability to deliver existing orders

Increased difficulty of financing

Existing loans cannot be extended

Disruption of logistics

Upstream and downstream chain disruptions

Insufficient protective equipment (e.g. masks)

Other, please specify: ___________________

Expected impact of COVID-19

4. What impact do you currently expect on your firm’s revenue this year as a result of COVID-

19?

No impact

Decrease

Increase

Too early to state

I don’t know

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4.1 Please specify percentage (%) of decreased or increased revenue

5. Is your firm currently considering layoffs, or has already done some because of the pandemic?

Yes (go to question 5.1)

No (go to question 6)

5.1. What percentage of staff are you expecting to (or have already) cut?

_____% (go to question 5.2)

Too early to state (go to question 6)

5.2. Do you expect these layoffs to be temporary or permanent (total should sum up to 100%)?

____% Temporary

____% Permanent

____% Too early to state

5.2.1 From temporary layoff, how many percentage of women, please estimate (%women)?

5.2.2 From permanent layoff, how many percentage of women, please estimate (%women)?

5.3. If possible, please indicate how these layoffs are distributed with respect to their

qualification (please insert value as percent of total sales for every option; total should sum

up to 100%)

___% University degree

___% Technicians

___% Semi-skilled

% Unskilled

___% Apprentice

Unable to say at this stage

5.4. If possible, please indicate how these layoffs are distributed over the following areas

(please insert value as percent of total sales for every option; total should sum up to 100%)

___% Research and development

___% Design

___% Manufacturing / assembly

___% Customer service

___% Administrative

Unable to say at this stage

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6. Are there currently restrictions by your government that impact your normal way of operating

as a business?

Yes (go to question 6.1)

No (go to question 7)

6.1. If the current restrictions in your country continue, how long can your firm’s current cash

flow maintain operation?

Indefinitely

More than 12 months

Between 6 and 12 months

Between 3 and 6 months

Between 1 and 3 months

Less than 1 month

7. If the international COVID-19 crisis were to end today, how long would you estimate it would

take for your company to get back to business as usual?

_____ days

Dealing with COVID-19

8. What is the main means you are considering to deal with the cash flow shortage? (Up to two

options)

Loans by commercial banks

Loans by Internet finance

Loans by microfinance companies or private individuals

Negotiating with lenders to avoid withdrawing loans

Equity financing (adding new shareholders or capital increase of former shareholders)

Reduction of operating costs (e.g. layoffs and salary reductions)

No cash flow shortfalls problem

Other, please specify: ___________________

9. What is the main means you are considering to deal with the shortage of workers? (Up to two

options)

Wage increases

Use of advanced equipment or software to reduce the amount of work

Outsourcing of orders

Delay in delivery

No shortage of workers

Other, please specify: ___________________

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10. What is the main means you are currently considering to deal with the shortage of inputs such

as intermediate goods and raw materials? (Up to two options)

Reduction of production

Outsourcing orders

Increasing the procurement channels

Seeking new production channels

Delaying goods delivery

No shortage of inputs

Other, please specify: ___________________

11. What is the main means you are currently considering to deal with difficulties in fulfilling

contracts?

Settlement by mutual agreement

Legal or arbitral settlement

Expect the government to coordinate and provide clear disclaimer agreements

Payment of liquidated damages

No contractual performance issues

Other, please specify: ___________________

12 Are there currently any measures / support packages by your government that your company

is benefiting from?

Yes (go to 12.1)

No (go to 13)

12.1. Please specify what measures/support you are receiving:

Fiscal Incentives; Elimination of Income Taxes & Imported Goods Taxes, Corporate

Tax Reduction and the Acceleration of VAT Restitution

Non-Fiscal Incentives (Simplification and Acceleration of the Exim Process)

Exemption of MSME income tax (to 0%) for a period of 6 months: Tariff decrease in

MSME's Final Income Tax from 0.5% - 0%

Interest subsidy and recap guarantee relief programmes (KUR, PMN, Pegadaian)

Other, please specify: ___________________

12.2. To what degree this support is useful to your company

Strongly beneficial

Beneficial

Neutral

Almost beneficial

Not beneficial

Other, please specify: ___________________

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13. In the face of the impact of the pandemic, governments at all levels and financial institutions

have announced relief measures. Which policy do you believe is the most effective for your

firm? (Up to two options)

Reduce rent for small and medium-sized enterprises and lower costs for electricity, gas,

logistics, etc.

Reduction of tax rates, reduction or deferral of taxes

Reduction of financing costs for SMEs, extension of loan terms or partial debt relief

Temporary reduction of social insurance premiums and reimbursement of

unemployment insurance to enterprises that do not lay off staff

Optimization of exporting tax rebate services

Others, please specify:_________________

Background Information:

Profile of the firm

14. When did the firm start to operate?

Insert year

15. Please select the industry that best describes the products your firm produces:

Food and beverages

Tobacco products

Textiles

Wearing apparel, fur

Leather, leather products and footwear

Wood products (excl. furniture)

Paper and paper products

Printing and publishing

Coke, refined petroleum products, nuclear fuel

Chemicals and chemical products

Rubber and plastics products

Non-metallic mineral products

Basic metals

Fabricated metal products

Machinery and equipment n.e.c.

Office, accounting and computing machinery

Electrical machinery and apparatus

Radio, television and communication equipment

Medical, precision and optical instruments

Motor vehicles, trailers, semi-trailers

Other transport equipment

Furniture; manufacturing n.e.c.

Recycling

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16. What is the ownership structure of your company?

100% nationally owned enterprise

Foreign subsidiary

Joint venture

Other, please specify: ___________________

17. What was the number of employees of the firm at the end of 2019?

Insert the number of employees at the end of 2019

17.1 Please estimate percentage of woman employee (% women)

18. In relation to the main production activity, the firm produces predominantly (please select

one option):

Finished goods for consumers

Finished goods for industrial business

Intermediate inputs for agriculture

Intermediate inputs for manufacturing

Intermediate inputs for services

19. Which share of purchases of raw materials and intermediate goods corresponded to each of

these categories in 2019? (please insert value as percent of total sales for every option; total

should sum up to 100%):

___% Import: foreign suppliers

___% National: Multinational corporations/foreign-owned suppliers located in the county

___% National: domestic suppliers

20. Which share of sales/turnover corresponded to each of these categories in 2019 (please insert

value as percent of total sales for every option; total should sum up to 100%):

___% Export: foreign costumers

___% National: Multinational corporations /foreign-owned customers located in the

country

___% National: domestic customers

21. Has the firm run part of its production activity in another country in 2019 (offshores)?

(please select one option):

Yes, through direct investment (i.e. foreign affiliates/controlled firms)

Yes, through contracts with domestic firms abroad (e.g. technical/manufacturing

partnership agreement, licensing agreement)

No

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22. Which regions does your company have offices or production plants in?

Aceh

Bengkulu

Jambi

Kepulauan Bangka Belitung

Kepulauan Riau

Lampung

Riau

Sumatra Barat

Sumatra Selatan

Sumatra Utara

Banten

Gorontalo

DKI Jakarta

Jawa Barat

Jawa Tengah

Jawa Timur

DI Yogyakarta

Kalimantan Barat

Kalimantan Selatan

Kalimantan Tengah

Kalimantan Timur

Kalimantan Utara

Maluku

Maluku Utara

Bali

Nusa Tenggara Barat

Nusa Tenggara Timur

Papua

Papua Barat

Sulawesi Barat

Sulawesi Selatan

Sulawesi Tengah

Sulawesi Tenggara

Sulawesi Utara

Follow up

23. We would greatly appreciate your participation in a follow-up survey in a few months. If

you would like to participate, please leave your contact details:

Name:

Email:

Vienna International Centre Wagramerstr. 5, P.O. Box 300, A-1400 Vienna, Austria

unido@unido.org

www.unido.org

+43 (1) 26026-0